Hedge fund billionaire Seth Klarman is returning cash to clients — and that shows how hard investing can be

These quotes come from an interview legendary hedge fund investor
Seth Klarman gave to the Wall Street
Journal. Klarman isn’t as well known to the general investing
public as some of his peers but his track record ranks right up
there in terms of the greatest of all-time. When someone like
Klarman makes these types of warnings it’s hard to ignore.

But here’s the kicker — Klarman made these comments in May of
2010. The S&P 500 is up almost 170% since then. The economy
hasn’t gone off the rails. The European Union didn’t fall apart.

Seeing that he’s a hedge fund manager and all, he did hedge these
comments somewhat by saying his ideas, “on bottom-up
opportunities in undervalued securities are more likely to be
accurate than my top-down views on what’s going to happen in the
world at large.”

It may be hard to remember this now but at the time it wasn’t
quite so clear markets would see such a strong recovery with the
onset of the European debt crisis, double-dip recession worries,
and the memory of the worst financial crisis since the Great
Depression fresh in investor memories.

Plus, Klarman makes his living buying distressed assets. He buys
securities that most investors can’t or won’t buy. Lately, he’s
been having a hard time finding distressed assets since there
hasn’t been much distress in the markets.

Seth Klarman’s $30 billion Baupost Group plans to return some
capital to investors by year end because the hedge fund doesn’t
see enough opportunities in the market.

Investors were told in recent weeks that the firm expects to
return capital for the third time in its history, according to a
person with knowledge of the matter. Boston-based Baupost is
holding 42 percent of its assets in cash and wants to balance the
money it manages with potential opportunities, said the person,
who declined to be named because the information is private. It
is unclear how much will be given back.

Hedge
funds have taken it on the chin in recent years but I
think investors can learn a lot from these two stories about Seth
Klarman:

Watch what they do, not what they
say. Klarman doesn’t make many public statements
but plenty of other high profile portfolio managers do. Most
of the time what they say in public has little-to-no bearing on
how they manage assets.

Macro tourism has really ramped up since the financial crisis so
everyone feels the need to share their opinions on the state of
the world. Client letters, TV appearances, interviews and
speeches tell you a lot about a fund manager’s personal opinions
but usually very little about actual investment insights.

The majority of investors will never be able to access
the best hedge fund managers. I saw Klarman speak
to a group of foundations and endowments in
2009. Everyone in the room, many with
multi-billion dollar portfolios, wanted to invest with Baupost
Group. Klarman rarely opens up his fund to new investors and when
he does there’s a queue of institutional investors on a waiting
list to get in.

The paradox of active management is that there are investors out
there who can beat the market and have done so handily for years
but they probably don’t want or need your money. And finding
the next Seth Klarman might be even harder
than finding your way into his fund.

Treating your investors right is more important than fee
revenue. Some fund firms may not agree with me here
but one of the reasons Klarman’s track record is so phenomenal is
because he’s selective about who he lets into his fund and tries
to keep assets at a manageable level. Sending money back to
investors when there aren’t enough opportunities in the markets
may seem like madness to some portfolio managers.

I think it’s a highly respectable practice. Klarman runs a unique
style of investing. He’s giving his investors the chance to
allocate their funds elsewhere while he has a dearth of options
with his opportunistic style. I’m sure he’ll open things up again
when assets are on sale yet again, whenever that may be.